Back to Banking Basics

George Putnam III, editor of The Turnaround Letter, says Ohio-based Fifth Third came back from the brink during the financial crisis, and its stock and dividend look good for the future.

In July, the American Association for Individual Investors (AAII) [reported] that individual investors were fleeing from stocks. Now it appears that pension plans are heading in the same direction. The Center for Retirement Research at Boston College (CRR) recently published data showing that private pension plans had reduced their allocations to equities to 45%, down from 70% in 2006.

With everyone else bailing out of stocks, does that mean you should, too? Absolutely not.

According to the AAII survey, individual investors had their lowest allocations to equities in early 1991, late 2002, and early 2009–in each case, just as the stock market was beginning a huge upswing. And the pros didn’t do much better.

Admittedly, stocks have given investors a pretty bumpy ride over the last decade, but we still think they will provide the best returns in the years to come.

Fifth Third Bancorp (Nasdaq: FITB) is a large regional bank holding company headquartered in Cincinnati, Ohio, that traces its roots back to 1858. Historically regarded as conservative and well run with most of its operations in the Midwest, the company’s problems began when it acquired First National Bankshares of Florida. This pushed it into the superheated and eventually disastrous Florida real estate market, exacerbated by the severe economic downturn in some of its traditional markets such as Ohio and Michigan.

During the financial meltdown, it wasn’t clear that the bank would survive. The stock, which had been in the high $60s earlier in the decade, traded down to $1.01 in February 2009. However, with the help of TARP funds from the government and an infusion of private capital, Fifth Third was able to pull back from the brink.

Fifth Third is now on the mend. The company is being aggressive about writing off many nonperforming loans and selling others. As a result, nonperforming assets have been reduced by 35% over the past year.

Moreover, the company is beginning to see signs of growth in its traditional business, as evidenced by a small increase in lending activity in the latest quarter. The bank has been profitable for the last two quarters and appears likely to remain so.

The stock currently trades at less than 1.3x book value and about 12x next year’s still depressed expected earnings. [From 1994 to] 2007, the stock traded at an average of more than four times book value and 23x earnings.

When conditions got rough, the company cut its dividend to its current nominal four cents per share. But in the past it has had a generous dividend policy. (The annual dividend rate reached $1.76 per share in late 2007). As results improve, we expect to see the dividend boosted significantly.

By [returning to its] conservative practices, Fifth Third is poised to prosper even as many of its competitors continue to struggle. We recommend buying Fifth Third stock up to $17. (It closed below $13 Tuesday—Editor.)